Understanding the Complex World of Student Loan Forgiveness
Let’s begin to unravel this student loan forgiveness complexity. There’s a myth that student loans will stick with you forever, no matter what, even through bankruptcy. While this isn’t exactly true, that kind of fear says a lot about the crushing debt and bountiful stress that student loans cause after four years at your local University.
“I never had the high-paying job or the company car. It took me over a decade to pay off my student loans. I never had to worry about where to dock my yacht to reduce my taxes.”
—Christine O’Donnel, Politician
According to Student Loan Hero, student loans account for 1.26 trillion in the United States and there are approximately 43.3 million Americans with the educational debt. Of those millions, each individual will pay somewhere between $203 and $351 per month on average, which can last for decades.
The Student Debt Crisis
“May your college memories last as long as your student loan payments.”
When looking at student loan forgiveness, most online articles will focus on the rapid growth of debts when it comes to student obligations on a national level, but these unfortunate milestones only provide the broad strokes. Over the past twenty years, the debt after graduation has steadily increased in a way that triples those bills of the past.
In the early 1990s, about half of the students graduated with $10,000 in debt, but recently, two-thirds are graduating with about $35,000 in debt. To give you an example of this massive figure, it equals a therapist’s salary, a new luxury car, and some odd medical work.
The debt continues to build because government grants, FSFSA and other supports for post-education are losing the race with the cost of college. Essentially, this means the burden for education costs have “shifted much of the burden of paying for college from the federal and state governments to families,” according to Time. Not only does it cost more, but also, alumni are also likely to make less after graduation.
With that shift in mind, it’s important to remember that family income has been in a plateaued state since the year 2000, so students are forced to borrow more than their families could have ever afforded to pay. These costs have also downshifted the enrollments from four-year to two-year college attendees and declined overall bachelor’s degrees for families with low or moderate incomes.
Debt Can Delay Major Life Events
“You must gain control over your money or the lack of it will forever control you.”
—Dave Ramsey, Financial Advisor
For various cultural and economic reasons, major life events such as getting married, starting a family, or even moving away from home have completely halted those with student debts. Approximately 20 percent of graduates are even forced to take jobs in other fields because the odds seemed to be stacked against them.
In one study, the Atlantic reports that Americans are getting married later than ever before. According to their data, “the average age of first marriage in the United States is 27 for women and 29 for men, up from 23 for women and 26 for men in 1990, and 20 and 22 in 1960.” For millennials, this means your grandparents had multiple children before you even graduated from school.
Another massive issue (that unfortunately doesn’t have the data to support it specifically) would be the impact on all of the students who drop out for various reasons. Federal student loan regulations require for individuals to return a portion (or all) of the withdraws if at least 60 percent of loan period has expired.
What is Student Loan Forgiveness?
“Private student loans should be avoided at all costs.”
—Suze Orman, Finance Author
There are several ways to get Federal Student Loan Forgiveness. First, make sure that your loans aren’t in default. If they haven’t been paid in nine months, then forgiveness is unlikely to say the least. Other issues arise with private student loans, as they also do not offer forgiveness (if this occurs, ask your lender for advice).
Perkins Loan Cancellation: A beneficial solution to those in the public service arena, the Perkins Loan Cancellation can also pay in full. Teachers, firefighters, nurses and the like all qualify. Similar to any government program, there are requirements to consider when looking for aid to forgive student loans.
Only Perkins loan are eligible. Teachers who wish to apply must work full time in a low-income public school and/or will need to teach within the fields of math, science, or a foreign language. These loans can exist between $27,500 and $32,500, generally speaking.
Public Service Loan Forgiveness: If you work for 10 years as a government employee—meaning firefighters, military, medical, or teachers—your remaining federal loan balance could be forgiven within this program. This is perfect for those in the government who plan to stay in their field for at least a decade.
To save the most—and if you already have a government job—it’s best to repay your loans on an income-based payment plan. This government initiative began in 2007, so it only applies to federal loans but it’s possible to consolidate other types within the Public Service Loan Forgiveness method.
Teacher Loan Forgiveness: Similar to the public service forgiveness, Teacher Loan Forgiveness also helps to those who serve. For any teacher who works at least five years in their field, they can have up to $17,500 forgiven. Within the restrictions, this loan is only available to those who work in low-income public schools with loans taken out after October 1, 1998.
The Public Service method is more forgiving, but for those teachers with smaller loans to pay, the Teacher Loan Forgiveness plan provides a cure in half the time. They plans can’t overlap but it’s possible to do one after the other if you were considering teaching for 15 or more years at a qualified location.
Income-Driven Replacement: The federal government offers four plans based on income, which can help reduce the percentage owed each month. These include the following:
- Income-based repayment
- Income-contingent repayment
- Pay as you earn
- Revised pay as you earn
These programs will forgive a loan after 20 or 25 years in full. These plans were designed for those who borrow large amounts but never really increase their salaries. There are restrictions, but the Revised plan is open to any federal student loan borrower, despite amount earned, so it’s a little less complicated overall.
For those who have acquired substantial student loan debts (and who are also willing to save up money for future tax bills), this may be the best option. Forgiveness is beneficial for income-driven plans, but they can also acquire the highest amount of interest. Borrowers should plan to pay income taxes on the amount that is to be forgiven.
Other Teacher Forgiveness Programs by State
Many of these plans are meant to aid teachers and there are even more options on a state level. Consider the following:
- Illinois has a Loan Replacement Program that amounts to $5,000 and awards teachers who work in low-income schools for 5 years.
- New York awards up to $24,000 for teachers who work 6+ years in an authorized New York City Department of Education School.
- Texas awards up to $2,500 for teachers who work in a field or specific community that has a shortage of qualified educators.
If your state isn’t listed, consider searching online for your state’s forgiveness plans. Other states also have plans for lawyers and doctors who serve certain areas.
Obama’s Student Debt Forgiveness
“If you’re walking down the right path and you’re willing to keep walking, eventually you’ll make progress.”
—President Barack Obama
President Barack Obama’s name has been applied to the Student Debt Forgiveness that actually began from the William D. Ford Direct Loan Program. Most people heard about the program when President Obama reformed part of the Direct Loan, when he signed the Health Care and Education Reconciliation Act of 2010.
The following list touches on some of the plan’s updates:
- The money will be used to fund poor and minority students, in an effort to increase college funding.
- The federal government can no longer provide subsidies to private lending institutions for federally backed loans.
- Borrowers after 2014 can make payments based on 10 percent of their discretionary income.
- New borrowers may be eligible for student debt forgiveness after 20 to 25 years of qualifying payments.
Another benefit of this overall plan is that interest does not capitalize on the subsidized portions of the loan (for the first three years of a payment plan). Consider the following examples from Student Debt Relief:
Interest Forgiveness: Borrower owes $40,000 in Subsidized loans. The interest rate is 6.875%, and the term is 25 years. Borrower is single with an adjusted gross income of $25,000/yr. The interest on this loan would normally be $229.17 per month, but the borrower would qualify for an IBR payment of $93.69. In this case, the borrower would be forgiven $229.17 – $93.69 = $135.48 of interest per month.
If this persons financial situation does not change for three years, they would be forgiven $135.48 x 36 = $4,877.28.
End of Term Forgiveness: Borrower owes $85,000 in federal student loans. The interest rate is 6.875% and the term is 25 years in the Income Based Repayment Plan. The borrower is currently earning $35,000 per year, and expects their income to stay the same for the term of the loan. This borrower would qualify for an IBR payment of $218.69, and assuming the income doesn’t change, would make these payments for 25 years or 300 payments. The total amount the borrower would pay on this loan is 300 x $218.69 = $65,607 of the original $85,000 that was borrowed.
This person would qualify for $19,393 in student loan forgiveness after making those qualifying payments. This does not include the interest that is being forgiven as the borrower would normally pay much more than the original debt due to the interest on the loan.
Risks of the Student Loan Forgiveness Program
“Education is what remains after one has forgotten what one has learned in school.”
Forbes writer Robert Farrington advises, “The hunt for the elusive student loan forgiveness programs can lead borrowers down dangerous paths which they may not fully understand.” Much like the “fine print” that got many students into their immeasurable debt in the first place, Farrington is right that it’s always important to pay attention to any commitments that require a signature.
The terms and conditions within the loan forgiveness or teacher student loan forgiveness are quite strict. With teachers, for example, you need to teach for 10 years (which is 120 payments) and you must also work at a qualified public service organization for the entirety of that decade. You also have to turn in your qualifications annually and failing to do so could result in a disqualification.
With this limitation in mind, it’s really important to mind your P’s and Q’s as a disqualification could mean tens of thousands of dollars when the goal is to forgive student loans. In addition to the yearly paperwork, other factors involved include missed payments, job changes, and any final paperwork due at the end of the cycle.
Start Saving and Repaying Debts Today
“A Lannister always pays his debts.”
Tyrion Lannister, Game of Thrones
When it comes to problem solving and finding a solution to paying off a huge debt, it’s easy to get lost in the information and advice. Rather than get bogged down in the details and move in the wrong direction all-together, start by saving money and cutting some of your expenses with the end results in mind.
There are literally hundreds of ways to save money, such as using bank accounts with high interest savings, cancelling unnecessary subscriptions, sticking to shopping lists rather than frivolous spending, or simply quitting bad habits. Doing some of these quick changes can get you started in the right direction.
More than likely, even if you qualify for one of the programs mentioned above, you’ll still need a little extra money to start paying even the smallest monthly payment. Cut the slack where you can and make sure you never miss a payment. Set your plan in motion and read up every so often to make sure you’re taking advantage of the best opportunities available for you.